Beige Book Report: Cleveland
January 13, 1977
The pace of economic activity will apparently quicken this quarter. Most inventory corrections in steel, chemicals, and major appliances are apparently completed, although some adjustment may continue into this quarter. Recovery in capital goods remains mixed. Natural gas supplies have tightened but have not caused plant shutdowns. Prices remain under upward pressures. Many deposit-type institutions in Cleveland have cut their rates on passbook savings accounts. Thrift institutions in several major metropolitan centers of the District have tightened terms on savings certificates.
Rising activity characterizes several key industries in the District, including steel, machine tools, rubber, communications equipment, printing equipment, and heavy-duty trucks. Last month's increase in orders for steel reversed a downtrend that began in the second half of 1976. Machine tool orders, according to an economist associated with a producer, were the highest for any fourth quarter on record although, in real terms, orders were still only 75 percent of their peak in 1973. A producer of communications equipment and printing equipment reports its order rate in the last two months was nearly double its sales in 1975.
The bulk of the inventory correction in the same key industries was completed last quarter, but manufacturers and retailers are likely to reduce their stocks again this quarter. The sharp rise in steel orders last month is attributed partly to near completion of inventory liquidation of steel products. Order and shipments are forecast to trend upward throughout 1977, according to steel economists. Manufacturers' stocks of major appliances are still high despite recent cutbacks in production, according to an economist with a major appliance producer. His estimates indicate that the worst of the inventory adjustment is over and that production will begin to rise in line with sales. Shipments in 1977 are expected to rise 7 percent from last year. Production of plastic resins rose again last month as a result of a virtual end of inventory correction, but a financial officer with a large chemical producer expects some of its lines to remain sluggish until later this quarter.
Some retailers still have excess stocks. Retailers described sales during the Christmas season as ranging from good to better than expected but not boomy. Several commented that markdowns spurted sales in the two weeks before Christmas and helped bring stocks more in line with planned levels. A large discount chain reported that sales were excellent, but stocks were still somewhat higher than normal.
Curtailed production of small cars and spottiness in capital goods continue to hamper production and employment gains in the District. GMC's Lordstown plant announced another three-week shutdown of small car facilities this month because of poor sales and excess stocks. Manufacturers of construction machinery, heavy equipment used in the utility industry, and mining machinery report business is still soft.
Well-below normal temperatures throughout the District since last fall have tightened supplies of distillate fuel and natural gas. Consistent curtailment of supplies of natural gas by one major distributor has so far affected schools and small businesses, and a recent 50 percent curtailment affecting major users will apparently hurt the tomato greenhouse operation in the Cleveland area. A large distillate fuel producer reports that supplies from December 1976 through March 1977 will be adequate unless temperatures average more than 15 percentage points below normal for that period. An officer with another major natural gas distributor stated that industrial firms it serves have not been affected by short supplies. He indicates that reserves will be insufficient if well below normal temperatures persist. He noted that natural gas consumption in 1977 is not expected to exceed 1976 because higher prices have cut consumption.
Upward price pressures remain strong. Preliminary results of this Bank's latest monthly survey of manufacturers show that the proportion of respondents who expect price increases is as high in January as it had been for the past two months. The recent price increases for flat-rolled steel products are apparently sticking, and several producers of welded tubing steel products announced a 6 percent price hike for those products effective January 15. A steel economist expects a price rise on tinplate and tin mill products in February. Iron ore prices are also scheduled to be increased next month, according to a major ore producer in the District. Natural gas prices will probably increase 20 cents a cubic foot this year and another 20 cents in 1978, according to an officer associated with a major gas distributor.
Lower savings deposit rates by some banks and savings and loan associations reported in last month's Redbook have spread through several major metropolitan centers of the District. The most competitive area has been Cleveland, where a major bank triggered the changes by reducing rates paid on deposits by businesses. That Bank has since reduced rates on home improvement loans, used car loans, and boat loans. Presently, passbook rates paid by major Cleveland banks have been cut to 4 1/2 percent. Some large savings and loan associations in Cleveland reduced the rate on passbook savings to 5 percent, but a few are paying 5 1/4 percent. Maturities and yields on savings certificates vary considerably, and some associations stopped offering certificates of less than one or two years in maturity and reduced rates on all certificates. Reductions in rates on passbook savings of about 1/4 percent are also reported in Columbus, Akron, and Canton. In Pittsburgh, neither banks nor savings and loan associations have decreased rates on passbook accounts, but the associations have lowered rates on certificates, and a few are no longer offering higher yield certificates. A major bank in Pittsburgh plans to retain maximum rates on certificates but will lengthen maturities.